TRACKER MORTGAGES account for an estimated 50 per cent of home loans although they are no longer offered to borrowers because they have become increasingly unprofitable for lenders since the economic downturn. Hence the concern of the Central Bank and the Financial Regulator that banks and building societies should communicate more clearly with customers about the cost and consequences of switching from a tracker-rate mortgage to a standard variable or a fixed rate alternative.
Since May 2009, the European Central Bank (ECB) has kept interest rates at an historic low level of 1 per cent. And because the ECB effectively sets the interest rate for tracker mortgages, repayments on these loans have not risen. In contrast, holders of variable mortgages have seen repayments increase sharply.
For banks and building societies as mortgage lenders, the problem is an imbalance in the market. Borrowers with tracker rate loans may pay an interest rate of 1.5 per cent, but those on a standard variable rate mortgage now pay twice as much. To fund their mortgage lending, financial institutions must borrow expensively on the wholesale market, a cost passed on to customers in higher interest rate charges and loan repayments. Consequently, the interest rate gap between tracker mortgages – set by the ECB – and variable rate mortgages – set by the market – has widened greatly.
The Financial Regulator, in a study of the mortgage market, found that financial institutions have failed to advise fully those who switch from a tracker mortgage to an alternative mortgage product. And while there was no evidence that lenders offered incentives to holders of tracker mortgages to switch, the regulator has insisted that banks and building societies provide full information to customers who are planning to change. Borrowers must receive indicative comparisons of the monthly repayment costs of the full range of mortgage productions, with the advantages and disadvantages of the different types of loans clearly set out.
Lenders have a legal obligation to act in the best interests of customers and the regulator is seeking to ensure the rights of borrowers are more fully vindicated. In addition, the introduction of a cooling off period for customers who have switched mortgages is being considered. Such a provision is a proven form of consumer protection and a common feature of many banking, credit and insurance transactions. Mortgages should not continue to be an exception.